Aug-24 update

Overall a good half year update, with a few things to be considered.

• Revenue higher than I expected, mainly because of performance fees. Their model is heavily biased towards management fees but some Australian clients (in particular), like them incentivized with a performance fee.
• Costs up more than you'd ideally want to see. It does track that the performance they've delivered will come with some fat bonuses though. Add to that the opening of new offices and acquisition of a private equity arm - altogether they've got some excuses for not seeing as much operating leverage as might be hoped.
• Acquisition of Private Capital Solutions business - I wouldn't have a Scooby Doo if this is a good idea or not. I would say that over US$70 million (debt funded) sounds like a decent wedge for a business that's not expected to materially add to earnings for 3-5 years. But what do I know?
• Re-reading the transcript I thought it was interesting that they have actively resigned commissions where clients have demands not aligned with their own. I think they'd be referring to ESG and other requirements that might result in lower alpha. Right at the end of the Q&A Rajiv said "Even now we have discussion with a few clients where we've offered to resign. And you will see that impact, by the way, in some of these future months of a little lumpiness because of that." He probably could have left that nugget unsaid.
• I now think it's trading much closer to fair value. It's a Hold for me at these levels. Analyst expectations for the full year have come up much closer to where I'm modelling them so I'm not expecting we'll see a repeat of the last 12 months, with the SP up over 100%.

Mar-24 update

After doing not much for some time (despite ever-increasing FUM), the share price has been on a bit of a tear of late. I still don't think it's expensive. On a trailing EPS basis it's around 15x, but FUM is more than 50% higher than the same point last year. On my figures, forward EPS is only 10x earnings. (Plus, using EPS is a conservative measure for GQG. The amortisation of a tax asset generated on listing means cash earnings are more closely aligned to EBITDA, and on that basis they're less than 8x my forward EBITDA).

There's a few things keeping it tamed. Until relatively recently the proposed merger with PAC was making some nervous and interventions by activist shareholder River Capital eventually scuppered the deal.

More recently PAC has just sold its remaining shareholding in GQG (circa 4%) at a discount to the current share price. But most importantly I just think the analysts are wrong. Given GQG's primarily management fee business model, once you know the FUM, you can guestimate revenue with a fair degree of certainty. Based on 9 estimates, analysts have forecast revenue of US$661m. I think FUM would have to hold where it is now to for revenue to be that low.

There's really only two drivers of FUM - flows and performance. Since inception in 2016 GQG has reported a month of negative flows just once, in April 2022. I don't see that changing dramatically in the near future. So that means you would have to assume performance will be negative. Their past performance speaks for itself (compared to benchmarks), but they won't be immune if there's a correction or market downturn. Is that what analysts are assuming? I can't think of another explanation.

One thing is for sure, the longer we go without a correction the more certain GQG's FY24 result becomes. I estimate revenue in the first two months of this year as US$108 million already.

Aug-23 update

A reasonably solid half year report - if largely expected given monthly FUM updates - from GQG.

The market didn't love it but you tell from the analysts questions why that would be the case, with questions centred around expected performance fee growth and shift in product mix to higher margin areas. These types of questions don't just miss the point but run counter to one of the key attributes of this fund manager - that being that they actively seek to get the overwhelming majority of their earnings from management fees and this fee should be set at a level that it can compete with passive strategies. The benefit of the above as an investor is that if you know what the blended management fee is (about 0.5%) you can use the monthly FUM updates to get what proves to be a very reliable predictor of revenue in any given period.

I also like the transparency of their disclosures, the fact they very openly called out two of the strategies underperforming in the past 6 months but still kept all the same disclosures/graphs etc. which clearly highlight this. All strategies have still significantly outperformed benchmarks over longer time periods.

Most of all I like the fact they're getting inflows - an average $1B a month in the first half - and combined with performance growth the FUM keeps growing. Inflows are key to this type of business. Despite this their multiple is close to an industry low. Based on some fairly conservative assumptions (FUM growing from $108B in Jul-23 to $112B in Dec-23) I think they're on a forward PE of about 11x.

The recent move to announce they would be putting in a bid for PAC was in some ways surprising and I wouldn't be devastated if it fell through, but given the first-hand knowledge Rajiv Jain and Tim Carver have of PAC, you'd have to give them the benefit of the doubt they could unlock some value. Since they made the announcement last month they're yet to put an offer on the table.

Alot of people don't like fund manager investments and that's fair enough as they're the very definition of a cyclical business, but with added leverage because when the market drops not only does FUM drop from rerating but the decline gets juiced down by outflows. For now though they're delivering and paying 90% of earnings as dividends while you wait for a rerate.

****

There's been lots of talk of whether Magellan's recent issues and share price sell off have been overdone and represent an opportunity. But how about a company in the same sector, is on a similar multiple but is growing much faster (any growth would tick that box) and is just printing cash and returning 90% of it back to shareholders.

In this excellent blog Martin Tran lays out the case for investing in GQG Partners. You might remember GQG listed last year, which crystalised a gain for Pacific Current Group (PAC) who partially own GQG and was the catalyst for a rerating of PAC. After listing at $2, GQG got caught up the broader market selloff and probably a bit of Magellan blowback and got as low as $1.12. It's currently trading around $1.40.

Without regurgitating the work Martin did in the blog below are some key points.

Good:

• relatively simple business to get your head around.
• very low capital/expense requirements, which means majority of growth flows straight to bottom line
• vast majority of revenue (97%+) is from management fees, which means that unlike some of its peers it's not a famine vs feast dynamic waiting for the company to hit high watermark benchmarks to generate performance fees.
• has a relatively low management fee (average 49bips) versus peers. This plays out as it being far more able to maintain margin and defend against the headwind of the increasingly popularity of passive investing options. It's also possible that this will be some (probably limited) protection against a period of underperformance.
• despite the above two points historical performance v benchmarks are very strong. Of it's four main products all have beaten benchmarks over 3 and 5 year timeframes and all but one have beaten benchmarks over a 1 year timeframe. This is reflected in inflows with FUM having grown from nil at inception in Jun 2016 to US$89.8 billion at 28 Feb 2022.
• 85-95% payout ratio paid quarterly with default of 90%

Less good:

• limited free float of around 20% of CDIs, with founders, PAC and employees making up the majority of the registry. Escrow for majority of these ends 30 Jun 22.
• key person risk, in particular CIO Rajiv Jain. Some of GQG's customers hold options to exit if Rajiv splits.
• highly exposed to currency movements, particularly USD.
• as we've seen with Magellan this is a highly competitive industry and if performance suffers it doesn't take long for this to be reflected in outflows.
• Not a risk as such but worth noting that prior to listing, as a partnership GQG wasn't subject to US Federal company tax but since listing it has started having to pay tax. This is likely to result in lower earnings in FY22 despite top line growth. It will also be subject to the amortisation of a deferred tax asset generated in the listing (US$16m p.a. for 15 years), although this is non-cash.
• vast majority of divis will be unfranked.
• you're buying CDIs and not ordinary shares, which for one thing means you don't get to vote at company meetings (if you value that).

It's difficult to predict growth rates as the biggest variable (market performance) is beyond GQG's control but I've used the same 15% p.a. as Martin and come up with a valuation of $1.77. That's far lower than their historical growth rate and could well be very conservative but better that than the alternative.

[Held IRL only, will need to sell some of my shitco microcaps to get them into Strawman]